Keeping the taxman happy is less of a challenge if you plan properly and take advantage of the many sources of help available. Tax adviser Mike Brown offers advice for licensees.
Contrary to popular opinion, the Inland Revenue and Customs and Excise are basically on the side of small businesses. However, the regulations still impose a heavy administrative burden.
The Inland Revenue offers detailed free advice to individuals wanting to set up in business. There are numerous helplines and websites which are designed to lead an entrepreneur through the maze of forms and regulations.
It is also imperative that independent advice is sought from a reputable accountant or tax adviser. They will have a breadth of experience and are ideally placed to give relevant, timely advice.
As well as the myriad of commercial issues facing the new entrepreneur, the following tax issues should be considered as soon as possible, as there are, of course, financial penalties for the unwary!
Registering as self-employed
If you start working for yourself you must register with the Inland Revenue as self-employed even if you already send in a tax return. You can register by calling the Inland Revenue helpline for the newly self employed on 08459 154515. If you fail to register within the first three months of self-employment you may be liable to a penalty of £100. If you do not register and are not paying tax, you will be breaking the law.
Once you have registered you will start to pay National Insurance. The Inland Revenue will advise on this. You may also need to register and charge for VAT. This will be the case if your annual taxable turnover reaches, or is likely to reach a set limit, currently £54,000 for 12 months. Voluntary registration is also possible at any time irrespective of turnover level. This will have the advantage that you can recover the VAT you have paid on your inputs. Detailed advice should be sought in these areas as VAT can be a complicated tax.
Keeping records and receipts
Not keeping proper records could mean paying more tax than you need to, as you will not be able to prove your income and expenses. Records are also essential to keep control of your business. By law you must keep records of all your business income and expenditure. These must be kept for at least five years from the latest date for sending back your tax return, that is until at least the fifth January 31 after the end of the relevant tax year. The Inland Revenue may need to see the actual records if they enter into an inquiry. Records will include not only your books but also source material such as invoices and receipts.
Self-assessment schedules
Self-assessment is the way in which individuals with untaxed income declare their earnings/profits and pay their tax. Each year a tax return must be prepared from your records to provide accurate information on your business income and expenditure. Once the Inland Revenue know that you are self employed they will send you a blank tax return, usually in April, covering the tax year that ended on that April 5. If you do not receive one, you will need to ask for one. It is seen as your responsibility and there are penalties for late filing.
If you want the Inland Revenue to calculate your tax liability for you, you will need to file your return with them before September 30 following the end of the tax year. Otherwise you will need to calculate it yourself and file your return before January 31 after the end of the tax year.
To avoid having to pay interest on unpaid tax, you must make your tax payments on time. There is also a surcharge if you are late in paying the balance of any tax due.
Most self-employed people make two payments on account for the tax year, before the return for that year is due, on January 31 in the tax year, and July 31 following the end of the tax year.
If, on submission of your tax return, you have not paid enough tax you will have to pay that balance on January 31 after the end of the tax year. In your first year of business you may not have to pay any payments on account, depending on your previous income streams. You should confirm this with your tax adviser.
Tax issues of employing staff
If you are thinking of employing staff you will have a number of issues to consider among which are the national minimum wage, Pay As You Earn, National Insurance, stakeholder pensions, Working Family's Tax Credit, and working hours legislation.
The Inland Revenue has developed a number of methods of giving employment advice to new businesses. These can be found by calling the new employer's helpline on 0845 6070143, where you can obtain a New Employer's Starter Pack. Alternatively your business or tax adviser will be able to assist.
Due to the sometimes temporary employment nature of barstaff, record keeping can become quite burdensome. Some staff will have no other income and may not, therefore, pay tax or National Insurance, whereas some will have other employment where tax and National Insurance is already being deducted.
Registering as a limited company
If you register as a limited company you will need to file accounts at Companies House as well as with the Inland Revenue. Anyone can then access those accounts from Companies House. So long as your turnover does not exceed £1million you will not require a statutory audit. If you remain as a sole trader or a partnership you only, in effect, file the accounts with the Inland Revenue. They are not, therefore, on the public record.
If you register as a company you will pay corporation tax on your company's profits, probably at a rate of 20 per cent depending on the level of profits. The profit is calculated after paying yourself a salary and employer's National Insurance. You will pay tax on your salary under PAYE, and will incur employee's National Insurance.If you are not registering as a company, you will pay income tax on your profits at a rate of 22 per cent. You will also pay Class 2 and Class 4 National Insurance.
Summary
There are many issues facing someone wishing to start their own business. This can be a daunting time for most. Remember, though, that help is at hand.
The authorities are more than willing to help and you can find reputable accountancy, business and tax advice from a number of sources. The choice of an adviser is a very personal matter, and may be the most important decision you ever take.
Further information
Mike Brown is a chartered tax adviser and is a senior manager working in the business services department ofaccountants Deloitte & Touche in Leeds.
He can be contacted on 0113 2921352 or via e.mail on mikbrown@deloitte.co.uk